FSLR - Top 2 Stocks For 2024 To Buy Before The Market Realizes It

2024-01-07 08:30:00 ET

Summary

• The technology sector is experiencing a harsh dose of reality as late FOMO buyers suffered a pullback after rushing before the year ended.
• Optimism among small speculators reached frothy levels in December, revisiting levels last seen in the pandemic bubble in 2021.
• The tech sector seems slightly overvalued. Assessing opportunities in the sector is compounded by high interest rates, uncertainty in the timing of the Fed's cuts, and potential sector rotation.
• I explain why I've selected these two stocks as my top picks for 2024. Investors looking to rotate their growth and tech stocks can consider these opportunities.
• However, it's also essential to assess the picks with urgency, as the market could return with a vengeance if the sector rotation thesis continues playing out accordingly.

The technology sector ( XLK ) reckoning has arrived as we started 2024's first trading week. What seemed like a nearly perfect December 2023 market outperformance has hit the late buyers hard. The retail FOMO fever hit a top in late December, as investors who failed to add exposure when Wall Street was highly pessimistic likely felt compelled to join in.

As a result, we recorded a significantly high level of optimism among what is classified as "small speculators," or non-reportable traders across the market at the end of December. The sentiments-driven chart shows the net position of these small speculators "adjusted for position size and index value, shown in billions of dollars." It should be clear that the surge in bullish optimism in December culminated with the frothy levels we last saw in 2021. In other words, investors who chased the December tech rally did ask for it: the hammering.

Based on the most updated price action in XLK, most of the gains in December have been lost this week (as of January 4's trading session). However, as the chart above is XLK's long-term chart, we will only get the resolution by the end of January. Hence, XLK Bulls will likely remind us that it's still too early to suggest ongoing weakness, and they are right. However, it also underscores why paying attention to price action and sentiment-driven metrics is fundamental to assessing risk/reward. Why? Is the tech sector generally overvalued? Yes. Based on Morningstar's sector valuation estimates, the tech sector is overvalued by about 5%.

In other words, it isn't nearly as bubbly as the significantly overvalued levels in the pandemic bubble of 2020/21. However, interest rates are also much higher than those days, suggesting a complicated interplay as the market assesses the appropriate discount rates for tech and growth stocks. The challenge is compounded by the uncertainty of when the Fed could initiate its rate cuts in 2024. Therefore, fundamentals-only investors are likely facing complex scenarios that would have been simpler if they had a chart to rely on while poring over fundamentally strong stocks to consider.

I've been rotating out of the high-flying tech stocks toward the end of December, as the melt-up presented several opportunities for me to do so. I wouldn't discuss the details here out of respect for my members as these are presented in my service. However, one thing is for sure: I've not been adding those high-flying tech stocks recently. In contrast, tech stocks that I added included those battered to peak pessimism, such as solar stocks.

With that in mind, I will present two top stocks for 2024 that I believe readers should consider adding to their portfolios.

Growth

First Solar, Inc. ( FSLR ) is my preferred play to partake in the potential recovery of solar stocks in 2024. Observant investors are likely aware that high interest rates, bloated downstream inventory issues, and an industry-wide demand slowdown hit solar stocks very hard in 2023. I presented a more detailed thesis on FSLR in early December , highlighting why I believe FSLR is well-primed to lead the recovery among its leading peers.

Furthermore, FSLR is assigned a best-in-class "A" growth grade and a "B-" valuation grade, suggesting a clear bifurcation for a growth stock. The market's pessimism has created a fantastic opportunity for investors keen to exploit this bifurcation, as FSLR has outperformed the SPX significantly since my update in mid-December. I believe the opportunity remains relatively early, as solar stocks could return with a vengeance in 2024 as the market re-rates the industry after a bruising 2023.

Value

Investors in big pharma Pfizer Inc. ( PFE ) saw PFE made a ten-year round trip in December, as it also hit peak pessimism. I also discussed this in an update in mid-December, suggesting why the market has finally forced a long-term capitulation. As a result, PFE lost all its COVID gains and more, as the market de-rated PFE significantly. Therefore, it seems like the market has completely lost confidence in its COVID franchise as investors exited in a hurry to prevent further losses from potentially materializing.

However, PFE bottomed out in December, as I anticipated. Its price action this week suggests selling pressure has remained controllable despite the broad market downdraft. As a result, I believe the market should eventually come to the realization that Pfizer is still a highly profitable wide-moat pharma company (assigned a best-in-class "A+" profitability grade). Wall Street analysts expect Pfizer's adjusted EPS growth malaise to bottom out this year, inflecting solidly back into growth in 2024 (+48% YoY) and 2025 (+24% YoY). We aren't talking about its long-term portfolio earnings accretion, as these are adjusted EPS growth metrics over the next two years. With an FY25 adjusted EPS multiple of 10.4x (well below its 10Y average of 12.9x), the market has likely baked in significant pessimism on Pfizer's execution to realize its earnings recovery.

Takeaway

With retail investors recently focused on high-flying tech stocks, I believe the ongoing rotation could deliver a harsh dose of reality to these investors. As investors keen on potentially outperforming, we must recognize the opportunities presented in the market through potential sector or industry rotations well before the rest of the market sees it.

Presented above are two stocks my members and I have already gotten on board, as the opportunity was timely. I believe investors looking to rotate their exposure from their overhyped tech and growth portfolio consider these two stocks as my top picks for 2024.

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